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Welcome to BPP Learning Media's ACCA Passcards for Paper F7 Financial Reporting. They focus on your exam and save you time. They incorporate diagrams to kick start your memory. They follow the overall structure of the BPP Learning Media Study Texts, but BPP Learning Media's ACCA Passcards are not just a condensed book. Each card has been separately designed for clear presentation. Topics are self contained and can be g rasped visually. ACCA Passcards are still just the right size for pockets, briefcases and bags. Run through the Passcards as often as you can during your final revision period. The day before the exam, try to go through the Passcards again! You will then be well on your way to passing your exams. Good luck!

Conceptual GAAP Objectives: Qualitative Elements Capital

Conceptual framework – a statement of generally accepted theoretical principles which form the frame of reference for financial reporting.

Advantages Disadvantages

Avoids 'patchwork' or firefighting approach Financial statements are intended for a variety of users – single framework may not suit all Less open to criticism of political/external pressure May need different standards for different purposes Some standards may concentrate on the income statement, others on the balance sheet Preparing and implementing standards is still difficult with a framework(001)ACF7PC14_CH01.qxp 3/25/2015 10:07 AM Page 3

Conceptual GAAP Objectives: Qualitative Elements Capital

framework assumptions characteristics maintenance

GAAP signifies all the rules, from whatever source, which govern accounting.

Sources for individual countries Non-mandatory sources

National company law Other countries' statutory requirements National accounting standards Local stock exchange requirements IASs/IFRSs if applicable

In many countries, like the UK, GAAP does not have any statutory or regulatory authority or definition. GAAP is a dynamic concept.

Page 3 1: The conceptual framework

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Conceptual GAAP Objectives: Qualitative Elements Capital

framework assumptions characteristics maintenance

Objectives of financial statements

Financial position Changes in financial performance Statement of financial position Statement of profit or loss and other comprehensiv e income Statement of cash flows Financial performance Statement of changes in equity Statement of profit or loss and other comprehensiv e income Notes to the financial statements Statement of cash flows Directors' report

Underlying assumption Going concern

(001)ACF7PC14_CH01.qxp 3/25/2015 10:07 AM Page 5

Conceptual GAAP Objectives: Qualitative Elements Capital

framework assumptions characteristics maintenance

FUNDAMENTAL

Relevance Faithful representation

Materiality Freedom Neutrality Completeness

from error

ENHANCING

Comparability Verifiability Timeliness Understandability

Consistency Disclosure of Users' knowledge

accounting policies

Page 5 1: The conceptual framework

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Conceptual GAAP Objectives: Qualitative Elements Capital

framework assumptions characteristics maintenance

Position Elements Performance

Assets Liabilities Income Expenses

+ Equity

Probable that any future

economic benefit Recognition The item has a cost or value that can be measured associated with the item will with reliability flow to the entity

Probability = a degree of uncertainty that the future economic benefits will flo w to or from the entity.(001)ACF7PC14_CH01.qxp 3/25/2015 10:07 AM Page 7

Measurement Historic cost (acquisition value)

Current cost (amount if Present value (present

How should an item discounted value of future acquired currently) be valued? net cash inflows item expected to generate)

Realisable (settlement) value (amount selling in current state)

Page 7 1: The conceptual framework

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Conceptual GAAP Objectives: Qualitative Elements Capital

framework assumptions characteristics maintenance

Financial capital maintenance Physical capital maintenance

Profit is earned if the financial amount of the net Profit is earned if the physical productive capacity assets at the end of a per iod exceeds the financial (or operating capacity) of the entity at the end of the amount of net assets at the beginning of a per iod period exceeds the physical productive capacity at after excluding any distributions to, and the beginning of the period, after excluding any contributions from, owners during period. distributions to and contributions from, owners during the period. This concept requires the current Can be measured in either nominal monetar y units cost basis of measurement. or units of constant purchasing power.

2: The regulatory framework

IASB IFRS Criticisms

IASB Financial reporting is governed on a worldwide basis by the International Accounting Standards Board. Decisions on accounting principles are made by the Board and issued in the f orm of IFRS (IAS).

Remember! Remember! Remember!

May 2000 – IOSCO gave EC directive: since 2005 Detailed comparison of qualified backing to 30 IAS. consolidated accounts of international and national listed entities must use IFRS. standards – The Convergence Handbook.(002)ACF7PC14_CH02.qxp 3/25/2015 1:12 PM Page 11

IASB IFRS Criticisms

The IASB issued 41 IASes. Standards are now called IFRS and 15 IFRSs have been issued so far. The procedure for issuing an IFRS can be summar ised as follows.

1 During the early stages of a project, IASB may establish an Advisory Committee to give advice on issues arising in the project. Consultation with the Advisory Committee and the Standards Advisor y Council occurs throughout the project 2 IASB may develop and publish Discussion Documents for public comment 3 Following the receipt and review of comments, IASB would develop and publish an Exposure Draft for public comment 4 Following the receipt and review of comments, the IASB would issue a final International Financial Reporting Standard

Page 11 2: The regulatory framework

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IASB IFRS Criticisms

Criticisms

Rigidity Criticisms Too much choice

Lack of flexibility in applying rules Benchmark treatment and allowed alternatives. These have been Recent standards eg IFRS 9 very largely eliminated. detailed and prescriptive Standards may be subject to Rules may not be applicable in all lobbying or government pressure. circumstances(003)ACF7PC14_CH03.qxp 3/25/2015 10:13 AM Page 13

3: Tangible non-current assets

Topic List IAS 16 should be familiar to you from your earlier

IAS 16 IAS 40 IAS 23

IAS 16 Property, plant and equipment covers all aspects of accounting for these items, which are most tangible non-current assets. Probable that future economic benefits Cost of asset can be associated with the assets Recognition reliably measured will flow to the entity

Subsequent expenditure Same criteria as initial costs. Otherwise do not capitalise but charge to profit or loss.

Subsequent measurement Cost model Revaluation model Depreciation

Cost less accumulated Revalued amount (fair value at Systematic basis over useful depreciation and the date of revaluation) less life reflecting pattern of use accumulated impairment subsequent accumulated of asset's economic benefits losses depreciation and impairment losses Periodic review of useful life Revalue sufficiently regularly and depreciation method and so carrying amount not any change accounted for as materially different from fair change in accounting value estimate All items of same class should be revalued

Page 15 3: Tangible non-current assets

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IAS 16 IAS 40 IAS 23

Changes in value

Surplus Impairment

Recognise and credit To extent of any revaluation Beyond revaluation

to revaluation surplus* surplus for same asset surplus

Charge to revaluation Charge to profit or

surplus loss

* Unless reversing a previously recognised revaluation decrease of the same asset, in which case recognise as income to the extent of reversal of the previous decrease.(003)ACF7PC14_CH03.qxp 3/25/2015 10:13 AM Page 17

IAS 16 IAS 40 IAS 23

Investment Property is property held to earn rentals or for capital appreciation or both, rather than for: a) use in the production or supply of goods or ser vices or for administrative purposes b) sale in the ordinary course of business Owner – occupied property cannot be classified as investment property.

Accounting treatment An entity can choose to hold investment property under either: a) the fair value model; or b) the cost model This choice will apply to all of its investment property.

Page 17 3: Tangible non-current assets

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IAS 16 IAS 40 IAS 23

IAS 23 Borrowing costs

The standard deals with borrowing costs for self-constructed assets. Included in borrowing costs

Borrowing costs Interest on bank overdrafts and short Interest and other costs incurred by an entity in connection with and long term borrowings the borrowing of funds Amortisation of discounts or premiums related to borrowings Qualifying asset Amortisation of ancillary costs incurred with the arrangement of borrowings An asset that necessarily takes a substantial period of time to Finance charges in respect of finance get ready for its intended sale or use leases under IAS 17 Exchange differences as far as they are an adjustment to interest costs Capitalisation is mandatory if the costs are directly attributable to the acquisition, construction or production of a qualifying asset.(004)ACF7PC14_CH04.qxp 3/25/2015 10:14 AM Page 19

4: Intangible assets

Topic List IAS 38 aims to prescribe the accounting treatment for

intangible assets not dealt with under another IFRS . The standard deals with the criteria for recognition and IAS 38 measurement.

Goodwill Goodwill is a controversial area. It comes up again in

Definition An intangible asset is an identifiable non-monetary asset without physical substance held for use in the production or supply of goods or ser vices, for rental to others, or for administrative purposes.

Recognition Initial measurement

Recognise if and only if: Intangible assets should initially be measured at cost. It is probable that the future economic benefits that are attributable to the asset will flow to the entity The cost of the asset can be measured reliab ly(004)ACF7PC14_CH04.qxp 3/25/2015 10:14 AM Page 21

INTERNALLY GENERATED INTANGIBLE ASSETS

Research phase Development phase

Recognise as expense Capitalise and amortise if Recognise as expense

when incurred following conditions are met: when incurred

P robable future economic benefits

I ntention to complete and use/sell R esources adequate to complete and use/sell A bility to use/sell T echnical feasibility E xpenditure can be reliably measured Internally generated bands, mastheads, publishing titles, customer lists and similar items should not be recognised as intangible assets.

Page 21 4: Intangible assets

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IAS 38 Goodwill

Subsequent expenditure Subsequent re-measurement

Subsequent expenditure must meet the original Cost model: cost less accumulated amortisation and recognition criteria to be added to the cost of the impairment losses intangible asset. Revaluation model: revalued amount less subsequent accumulated amortisation and impairment losses Amortisation Revalued amount is fair value at date of revaluation by reference to an active market Should be charged on a systematic basis o ver the useful life of the asset. Should commence when All other assets in the same class should be re valued asset available for use. Period and method to be unless there is no active market for them, in which reviewed at each year end. case the cost model value should be used for those assets. Intangibles with indefinite useful life are not amortised, but reviewed at least annually for Revaluations so that the carrying value does not offer impairment. materially from fair value(004)ACF7PC14_CH04.qxp 3/25/2015 10:14 AM Page 23

Impairment losses The recoverable amount of the asset should be deter mined at least at each financial year end and any impairment loss should be accounted for in accordance with IAS 36.

Disclosures Need to make the following disclosures. Distinguish between internally generated and other intangible assets Useful lives of assets and amor tisation methods Gross carrying amount and accumulated amortisation at start and end of period Where the amortisation is included in the statement of profit or loss and other comprehensiv e income A reconciliation of opening balance to closing balance If research and development, how much was charged as expense

Page 23 4: Intangible assets

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IAS 38 Goodwill

Goodwill can be purchased or be acquired as par t of a business combination. In either case, the treatment is capitalisation at cost or fair value under IFRS 3.

Negative goodwill Goodwill

Arises when acquirer's interest in identifiable net Future economic benefits arising from assets that assets exceeds the cost of the combination. Results are not capable of being individually identified and from errors or a bargain separately recognised Reassess cost of combination and assets. Recognise as an asset and measure at cost/e xcess of purchase cost over acquired interest Recognise any remaining goodwill immediately in profit or loss. Do not amortise Test at least annually for impairment (IAS 36)

You may be asked for a complicated calculation of goodwill as part of a group accounts question.(005)ACF7PC14_CH05.qxp 3/23/2015 12:52 PM Page 25

5: Impairment of assets

Topic List IAS 36 covers impairment of assets.

IAS 36(005)ACF7PC14_CH05.qxp 3/23/2015 12:52 PM Page 26

IAS 36

The aim of IAS 36 Impairment of assets is to ensure that assets are carr ied in the financial statements at no more than their recoverable amount. Note that IAS 36 does not apply to non-current assets held f or sale which are covered by IFRS 5. Recoverable amount = higher of

Net selling price (NSP) Value in Use (VIU)

Amount obtainable from the sale of PV of estimated future cash flows

an asset at fair value less cost of expected to arise from the continuing disposal use of an asset and its disposal at the end of its useful life Where it is not possible to estimate the recoverable amount of an individual asset, an entity should deter mine the recoverable amount of the cash-generating unit to which it belongs. The standard also specifies when an entity should re verse an impairment loss and prescribes certain disclosures for impaired assets.(005)ACF7PC14_CH05.qxp 3/23/2015 12:52 PM Page 27

Indicators of impairment A review for impairment of a non-current asset or goodwill should be carr ied out if events or changes in circumstances indicate that the carrying amount of the non-current asset or goodwill ma y not be recoverable. External indicators Internal indicators Fall in market value Obsolescence or physical damage Change in technological, legal or economic Adverse changes in use environment Adverse changes in asset's economic Increase in market interest rate likely to affect performance discount rates Carrying amount of entity's net assets > mar ket capitalisation

It may not be possible to associate cash flows with individual assets so the review of the recoverable amount will often have to be applied to cash generating units that contain groups of related assets.

Page 27 5: Impairment of assets

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IAS 36

Calculation of value in use

Include cash flows Exclude cash flows

Directly attributable Any future restructuring to which the enterprise

is not yet committed An appropriate proportion that can be allocated on a reasonable and consistent basis Future capital expenditure that will improve/enhance asset in excess of originally Net cash flows to be received or paid for the assessed standard of performance disposal of the asset at the end of its useful lif e on a fair value basis Financing activities Income tax receipts or payments

The discount rate should be a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the asset.(005)ACF7PC14_CH05.qxp 3/23/2015 12:52 PM Page 29

Allocation of impairment loss Recognition of losses

To the goodwill allocated to the cash Assets carried at historic cost – profit or loss 1 generating unit Revalued assets – under rules of applicable IAS Depreciation adjusted in future periods to allocate 2 To all other assets in the cash gener ating unit on a pro rata basis the asset's revised carrying amount less residual value over its remaining useful life

Page 29 5: Impairment of assets

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IAS 36

Reversal of past impairments

Where the recoverable amount increases, the resulting reversal should be recognised in the current per iod to the extent that it increases the carr ying amount up to the amount that it w ould have been (net of amor tisation or depreciation) had no impairment loss been recognised in pr ior years. Individual assets: recognise as income immediately unless the asset is carr ied at revalued amount under another IFRS in which case apply the r ules of that IFRS CGUs: exact opposite of its original recognition while ensuring that assets are not increased above the lower of their recoverable amount and their carrying amount (after depreciation or amor tisation) had there been no impairment loss Goodwill: not reversed in subsequent period unless: – The impairment was caused by a specific external event of an exceptional nature not expected to recur – Subsequent external events have occurred which reverse the effect of that event(005)ACF7PC14_CH05.qxp 3/23/2015 12:52 PM Page 31

Disclosure The amount of impairment losses recognised in the statement of profit or loss and other comprehensiv e income during the period and the line items affected The amount of impairment loss reversals recognised in the statement of profit or loss and other comprehensive income during the period and the line items affected The amount of impairment losses debited directly against equity in the per iod The amount of impairment loss reversals credited directly to equity in the per iod for material impairment losses or loss reversals: – The events and circumstances – The amount – The nature of the asset or cash gener ating unit – For initial losses whether recoverable amount is NSP or VIU (and details of basis of selling pr ice or discount rate as appropriate)

Topic List IFRS 15 Renevue from contracts with customers now

IFRS 15 5-Step model Performance IAS 20

obligations

IFRS 15 Revenue from contracts with customers

The core principle of IFRS 15 is that revenue is recognised to depict the tr ansfer of goods or services to a customer. Transfer of goods and services is based upon transfer of control over those goods and services. A contract with a customer contains a promise to tr ansfer goods or services. This promise is defined in IFRS 15 as a performance obligation.(006)ACF7PC14_CH06.qxp 3/28/2015 6:27 AM Page 35

IFRS 15 5-Step model Performance IAS 20

obligations

A performance obligation can be satisfied at a point in time or over time.

Where a performance obligation is satisfied at a point in time , this will be the point in time at which control is transferred to the customer. Indicators of this are: The entity has a right to payment The customer has legal title to the asset The customer has taken possession of the asset Risks and rewards have been transferred The customer has accepted the asset Where a performance obligation is satisfied over time it is necessary to establish the amount of performance completed during the accounting period. This can be measured using output methods (such as surveys of work completed) or input methods (such as labour hours or costs incurred). Contracts where performance obligations are satisfied over time are common in the constr uction industry.(006)ACF7PC14_CH06.qxp 3/28/2015 6:27 AM Page 37

Contract where performance obligations are satisfied over time

Outcome can be An entity must determine what Outcome cannot be

estimated reliably amounts to include as revenue and estimated reliably costs in each accounting period

Recognise contract Recognise revenue

revenue and contract only to extent of costs by reference to contract costs incurred amount of Any expected loss should be that it is probable will performance recognised as an expense be recovered. obligation satisfied immediately Recognise as expense in period incurred

Page 37 6: Revenue(006)ACF7PC14_CH06.qxp 3/28/2015 6:27 AM Page 38

IFRS 15 5-Step model Performance IAS 20

obligations

Where the outcome of a contract can be estimated reliably, a proportion of contract revenue and costs should be recognised in profit or loss by reference to the stage of completion (ie a propor tion that fairly reflects the amount of work done). This represents the amount of performance obligation satisfied. The stage of completion can be calculated in v arious ways including:

IFRS 15 5-Step model Performance IAS 20

obligations

IAS 20 Accounting for government grants and disclosure of government assistance requires the following accounting treatment.

Grants related to income Grants related to assets

Either show as credit in profit or loss (other income) Treat as deferred income and credit to profit or loss on or deduct in reporting the related expense systematic rational basis over useful life of asset OR deduct grant in arriving at carrying value of asset and recognise as income over asset's life by means of reduced depreciation charge

Disclose: Accounting policy Nature and extent of grants recognised Unfulfilled conditions and other contingencies Recognise only when reasonable assurance that any relating to grants recognised conditions will be met and monies received.(007)ACF7PC14_CH07.qxp 3/25/2015 10:51 AM Page 41

7: Introduction to groups

Topic List Consolidation is a very important area of your Paper F7

syllabus, likely to appear as a long question in P art B. This chapter looks at the basic definitions and rele vant Group accounts accounting standards. IFRS 10(007)ACF7PC14_CH07.qxp 3/25/2015 10:51 AM Page 42

Group IFRS 10 accounts

Subsidiary Control: An investor controls an investee when the

investor is exposed, or has rights to, variable An entity that is controlled by another entity known returns from its involvement with the investee and as the parent has the ability to affect those returns through power over the investee

Associate Significant influence: the power to participate in

the financial and operating policy decisions of an An entity in which an investor has significant economic activity but not control or joint control influence and which is neither a subsidiar y nor a joint venture of the investor over those policies

Easy marks can be gained for reproducing

these definitions. But make sure you understand them!(007)ACF7PC14_CH07.qxp 3/25/2015 10:51 AM Page 43

Summary of classification and treatment

Investment Criteria Required treatment in group accounts

Subsidiary Control (>50% rule) Full consolidation (see Chapter 9)

Associate Significant influence Equity accounting (see Chapter 11)

(20% + rule) Investment which is none of Assets held for accretion of As for single entity accounts the above wealth

Page 43 7: Introduction to groups

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Group IFRS 10 accounts

Other provisions of IFRS 10

Consolidated financial statements: The financial statements of a group presented as Exclusion those of a single economic entity IAS 27 effectively removed any exclusions. Subsidiaries held for sale must be accounted for in Exemption accordance with IFRS 5.

A parent need not prepare group accounts if it is

itself a wholly owned subsidiary Other If it is partially owned and the other owners do not object Different reporting dates – adjustments should Its securities are not publicly traded be made The ultimate or intermediate parent publishes Uniform accounting policies – if not, disclose IFRS – compliant consolidated accounts why. Adjustments should be made on Disclosures apply consolidation(008)ACF7PC14_CH08.qxp 3/25/2015 12:11 PM Page 45

8: The consolidated statement of financial position

Topic List This chapter introduces the basic techniques you will need to prepare a consolidated statement of financial position. Consolidated statement of financial The revision to IFRS 3 has brought another issue into position consolidation questions. There is now the option to value IFRS 3 revision the non-controlling interest at fair value. Look out for this.

Method Fair values(008)ACF7PC14_CH08.qxp 3/25/2015 12:11 PM Page 46

Consolidated statement IFRS 3 revision Method Fair values

of financial position

Purpose To show the assets and liabilities which it controls and their o wnership

Assets and liabilities Always 100% P plus S providing P has control

Share capital P only

Reason Simply reporting to the parent's shareholders in another f orm

100% P plus group share of post-acquisition retained reser ves of S less Retained earnings consolidation adjustments To show the extent to which the group actually owns assets and liabilities included in Reason the statement of financial position Non-controlling interest NCI share of S's consolidated assets less liabilities or fair value* To show the extent to which other par ties own assets and liabilities but under the Reason control of the parent * Note. If the NCI is at fair value you may be given a) the share pr ice or b) the fair value of the NCI(008)ACF7PC14_CH08.qxp 3/25/2015 12:11 PM Page 47

Fair value options

If you are required to account for NCI at fair value there are two options: 1) You may be told what fair value of the NCI is 2) You may be given the share price at the date of acquisition The examiner has said that he will usually e xamine NCI at FV, so be prepared for this.

Page 49 8: The consolidated statement of financial position

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Consolidated statement IFRS 3 revision Method Fair values

of financial position

1 Read the question and the requirements. 2 Group structure noting dates of acquisition.

3 Prepare necessary proforma required by question. Level of detail is dictated by level of detail in question Leave out cost of investment Include line for non-controlling interest

Consolidated statement IFRS 3 revision Method Fair values

of financial position

Fair values (IFRS 3) Fair value (IFRS 3)

On consolidation, the fair value of the consideration The amount for which an asset could be paid for a subsidiary is compared with the fair value of exchanged, or a liability settled, between the net assets. knowledgeable, willing parties in an arm's length IFRS 3 sets out rules determining the fair value of the transaction. purchase consideration, the fair value of identifiable assets and liabilities acquired and the fair value of specific net assets. New definition (IFRS 13) The price that would be received to sell an asset or paid to transfer a liability in an order ly transaction between market participants at the measurement date.

Page 53 8: The consolidated statement of financial position

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Consolidated statement IFRS 3 revision Method Fair values

of financial position

Fair value adjustment calculations

Goodwill is the difference between the cost of the acquisition and the acquirer's interest in the f air value of the identifiable assets and liabilities. So far we have used book value for the assets and liabilities. However, IFRS 3 states that we should use fair value. Therefore revaluations may be necessary to ensure that book value is equal to fair value.

In the exam the usual scenario is that the subsidiar y has not revalued to fair value and so a consolidation adjustment is needed.(009)ACF7PC14_CH09.qxp 3/25/2015 12:13 PM Page 55

9: The consolidated statement of profit or

loss and other comprehensive income

Topic List Under the revised IAS 1 the full statement is no w called the 'statement of profit or loss and other comprehensiv e income'. At F7 level some questions will only require the Consolidated statement of profit or first part of the statement, which will be ref erred to as the loss 'statement of profit or loss.'

Consolidated statement of profit or

Consolidated Consolidated statement of profit or

statement of profit or loss loss and other comprehensive income

Purpose To show the results of the group for an accounting period as if it were a single entity Sales revenue to profit after 100% P + 100% S (excluding dividend receivable from subsidiary and adjustments tax for intra-group transactions)

Reason To show the results of the group which were controlled by the parent

Intra-group sales Strip out intra-group activity from both sales revenue and cost of sales Unrealised profit on (a) Goods sold by P: increase cost of sales by unrealised profit intra-group sales (b) Goods sold by S: increase cost of sales by full amount of unrealised profit and decrease non-controlling interest by their share of unrealised profit If the value of S's non-current assets have been subjected to a fair value uplift then Depreciation any additional depreciation must be charged in the consolidated statement of profit or loss. The non-controlling interest will need to be adjusted f or their share(009)ACF7PC14_CH09.qxp 3/25/2015 12:13 PM Page 57

Transfer of non-current Expenses must be increased by any profit on the transfer and reduced by any assets additional depreciation arising from the increased carrying value of the asset. The net unrealised profit (ie the total profit on the sale less cum ulative 'excess' depreciation charges) should be eliminated from the carr ying amount of the asset and from the profit of the company that made the profit. For instance, H transfers an asset with a carr ying value of $1,000 to S for $1,100. Depreciation is 10% p.a. The net unrealised profit is $90. This is debited to H's statement of profit or loss and to the carr ying value of the asset Non-controlling interests NCI% of S's PAT

Consolidated Consolidated statement of profit or

statement of profit or loss loss and other comprehensive income

Consolidated statement of profit or loss

Adjustments required Eliminate intra group sales and purchases Eliminate unrealised profit on intra group purchases still in inventory at the year end Eliminate intra group dividends Split profit for the year between group and NCI

Procedure Combine all P and S results from revenue to profit after tax. Unrealised profits and losses: Time apportion where the acquisition is mid-year Only where S sells to P, allocate the Exclude intra group investment income unrealised profit between NCI and Calculate NCI (NCI% × PAT) P: Debit group retained earnings, Debit NCI, Credit inventory(009)ACF7PC14_CH09.qxp 3/25/2015 12:13 PM Page 59

Consolidated Consolidated statement of profit or

statement of profit or loss loss and other comprehensive income

Consolidated statement of comprehensive income

If there is a revaluation gain or loss in the parent or subsidiar y you will prepare a consolidated statement of profit or loss and other comprehensive income. This will only require a few additions to the consolidated statement of profit or loss . Revaluation gain in parent Revaluation gain in subsidiary (80%) $'000 $'000 Profit for the year 8,000* Profit for the year 8,000* Other comprehensive income: Other comprehensive income: Gains on property revaluation 2,000 Gains on property revaluation 2,000 Total comprehensive income for the year 10,000 Total comprehensive income for the year 10,000

10: Accounting for associates

Topic List As you know, an investment can be carried at cost, fully

consolidated or accounted for using the equity method, depending on the degree of control exercised. An Associates associate is accounted for using the equity method.(010)ACF7PC14_CH10.qxp 3/25/2015 12:13 PM Page 62

Associates

Individual investor's books Consolidated financial statements

Carry at cost, or Use equity method unless: In accordance with IFRS 9 as an equity in vestment Investment acquired and held exclusively with a view to disposal soon Investor ceases to have significant influence Statement of financial position In these cases record at cost. Initial cost X Add/less: post acquisition share of profits/losses (before dividends) Less: post-acquisition dividends received X/(X) Statement of profit or loss Group share of associate's PAT to avoid double counting (X) _____ Carrying value X _____ _____(011)ACF7PC14_CH11.qxp 3/25/2015 1:17 PM Page 63

11: Financial instruments

Topic List A financial instrument is defined in IAS 32 as an y

contract that gives rise to both a financial asset of one entity and a financial liability or equity instr ument of IAS 32 another. IAS 39 deals with how financial investments are measured and IFRS 7 covers disclosure. IFRS 9 IFRS 9 is the most recent standard which deals with IFRS 7 classification and measurement of assests. It now replaces IAS 39 for all issues covered by the F7 syllabus.(011)ACF7PC14_CH11.qxp 3/25/2015 1:17 PM Page 64

IAS 32 IFRS 9 IFRS 7

Because of the inherent difficulties in this comple x area, it is

hard for users to assess the nature, amount and cost of an Financial instrument: entity's debt and equity resources. Any contract that gives rise to a financial Before IAS 32 and IAS 39 many financial instruments were asset of one entity and a financial liability treated as off balance sheet finance and in visible to the user or equity instrument of another of accounts. Because of their significance, the IASB tackled the project in 3 phases: 1. IAS 32: Presentation (1995) ensured the user was aware of the instruments and risks Financial asset: 2. IAS 39: Recognition and Measurement (1998) prescribed Cash; equity instrument of another entity; specific accounting treatment as an inter im measure contractual right to receive cash/other Both standards were revised in December 2003 and IAS 39 is financial assets; contract that can be now being replaced by IFRS 9. settled in the entity's own equity 3. IFRS 7: Disclosure (2005) effective from 1 January 2007 instruments and may be either a derivative specifies disclosures required for financial instruments or a non-derivative(011)ACF7PC14_CH11.qxp 3/25/2015 1:17 PM Page 65

IAS 32 presentation Financial liability:

Contractual obligation to deliver cash/other Financial instruments should be classified as either financial asset; contractual obligation to – Liability (debt) or exchange financial instruments under – Equity potentially unfavourable conditions Compound instruments (exhibiting characteristics of both) must be split into their debt and equity components Substance rather than legal form applies (eg redeemable preference shares are a financial liability) Equity instrument: Interest, dividends, loss or gains relating to a financial Contract that evidences a residual interest instrument claimed as a liability are repor ted in the I/S, in the assets of an entity after deducting all while distributions to holders of equity instr uments are its liabilities debited directly to equity (in the SOCIE) Offset of a financial asset and liability is only allo wed where there is a legally enforceable right and the entity intends to settle net or simultaneously

Page 65 11: Financial instruments

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IAS 32 IFRS 9 IFRS 7

IFRS 9 IFRS 9 deals with recognition and measurement of financial assets and liabilities . It classifies assets on the basis of the entity's business model and the cash flow characteristic of the financial asset.

Fair value Amortised Fair value through

Subsequent measurement: Subsequent measurement:

financial assets (FA) financial liabilities (FL)

Amortised cost Fair value Fair value Amortised cost

Where held to Financial assets at fair Financial liabilities at fair All others collect contractual value through profit or value through profit or loss cash flows as loss Has to be held for trading specified dates Equity investments and classified at inception Assets held for trading at FV through profit or loss and to collect Gain or loss as a result of contracted cash flows change in credit risk must are measured at fair go through OCI value through OCI

Page 67 11: Financial instruments

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IAS 32 IFRS 9 IFRS 7

Calculations The method used in the following example applies to deep discount bonds and other similar instr uments (including zero coupon bonds).

Fair value is measured as quoted market price in an active market where possib le.

Page 69 11: Financial instruments

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IAS 32 IFRS 9 IFRS 7

Gains and losses (on Impairment

remeasurement Impairment review where evidence of financial asset being impaired to fair value) Original effective interest rate should be used when discounting future cash flows to calculate the impairment Held at fair value: profit or loss Impairment loss is charged to profit or loss Investments in equity instruments: reported in equity and under other Where investment in equity instrument suffers impairment loss, this comprehensive income is recognised in statement of changes in equity and under other comprehensive income(011)ACF7PC14_CH11.qxp 3/25/2015 1:17 PM Page 71

IAS 32 IFRS 9 IFRS 7

IFRS 7: Financial instruments: Disclosure

The objective of IFRS 7 is to require entities to pro vide disclosures in their financial statements that enab le users to evaluate: (a) The significance of financial instruments for the entity's financial position and performance (b) The nature and extent of risks arising from financial instruments to which the entity is exposed and how the entity manages those risks This information can influence a user's assessment of the financial position and perf ormance of an entity and of the nature of its future cash flows. In addition to the numerical disclosures required by IFRS 9, IFRS 7 encourages a narrative commentary by issuers of financial instruments, which will enable users to understand their attitude to r isk.

You will not be examined on the risks inherent in financial instruments.

Types of Accounting Disclosures:

IAS 17 IAS 17 Leases standardises the accounting treatment and disclosure of assets held under lease . It follows the substance over form principle.

Finance lease Lease Operating lease

A lease that transfers An agreement whereby the A lease other than a finance substantially all the risks and lessor conveys to the lessee lease rewards of ownership of an in return for rent the right to asset use an asset for an agreed period of time(012)ACF7PC14_CH12.qxp 3/25/2015 12:31 PM Page 75

Page 75 12: Leasing

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Types of Accounting Disclosures:

lease treatment lessees

Statement of financial position

Non current liabilities 1 Non current assets 2 Finance lease liabilities (note 4) X Included in the net book value of plant and equipment is $X in respect of assets held Current liabilities under finance leases 3 Finance lease liabilities (note 4) X Accruals (note 4) X Finance lease liabilities: reconciliation of minimum lease payments and present value 4 Within one year X (gross) Later than one year and not later than five years X (gross) Later than five years X (gross) Less future finance charges (X) ___ Present value of finance lease liabilities X ___ ___(012)ACF7PC14_CH12.qxp 3/25/2015 12:31 PM Page 77

Statement of financial position (continued)

Operating leases 5 Present value of finance lease liabilities 6 The future minimum lease payments under Within one year X (net) non-controllable operating leases are as Later than one year and follows: not later than five years X (net) Within one year X Later than five years X (net) ___ X Later than one year and ___ ___ not later than five years X Note. The minimum lease payments include Later than five years X ___ the finance charge element. The present X ___ ___ value is the capital element only of the lease liability.

Page 77 12: Leasing

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Types of Accounting Disclosures:

lease treatment lessees

Statement of profit or loss and other comprehensive income

Although not specifically required by IAS 17, companies tend to also disclose the f ollowing in the notes.

IAS 37 IAS 37 Provisions, contingent liabilities and contingent assets was brought in to remedy some abuses of provisions. Entities should not provide for costs that need to be incurred to Provision operate in the future, if those costs could be avoided by the entity's future actions A liability of uncertain timing or amount. Liabilities are obligations to Costs of restructuring are to be recognised as a provision only transfer economic benefits as a when the entity has an obligation to carry out the restructuring result of past transactions or events. The full amount of any decommissioning costs or environmental liabilities should be recognised from the date on which they arise

Contingent liability Contingent asset

Should be disclosed unless the possibility of an y Should be disclosed where an inflow of economic outflow of economic benefits to settle it is remote benefits is probable(013)ACF7PC14_CH13.qxp 3/28/2015 6:29 AM Page 81

Page 81 13: Provisions and events after the reporting period

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IAS 37 IAS 10

IAS 10 distinguishes between adjusting and non-adjusting events.

Adjusting events provide evidence of conditions that existed at the end of the repor ting period and require adjustment to be made to the financial statements .(014)ACF7PC14_CH14.qxp 3/25/2015 12:39 PM Page 83

14: Inventories and biological assets

Topic List You've met inventory and inventory valuation in your

earlier studies, so only a brief summary is given here. Biological assets are regulated by IAS 41 Agriculture – a IAS 2 new standard for this syllabus. IAS 41(014)ACF7PC14_CH14.qxp 3/25/2015 12:39 PM Page 84

IAS 2 IAS 41

Inventories

Lower of

Cost Net realisable value

Cost of Cost of Other Estimated selling price less costs to

purchase conversion costs completion less costs necessary to make the sale

Permitted treatment of cost: FIFO or weighted average

IAS 41: Agriculture

IAS 41 identifies the critical events associated with biological transformation as growth, procreation, production and degeneration. In the statement of financial position biological assets should be measured at fair value less estimated point- of-sale costs. Agricultural produce derived from biological assets is also measured at f air value less estimated point-of-sale costs.

Page 85 14: Inventories and biological assets

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Notes(015)ACF7PC14_CH15.qxp 3/25/2015 12:43 PM Page 87

15: Taxation

Topic List In nearly all countries entities pay tax on their trading income. There are two aspects to this: current tax and deferred tax. Current tax Most students find deferred tax more difficult than current Deferred tax tax, so study this section carefully. Questions in Paper F7 should not generally be too complicated. Taxable temporary differences Deductible temporary differences Disclosure(015)ACF7PC14_CH15.qxp 3/25/2015 12:43 PM Page 88

Current Deferred Taxable temporary Deductible Disclosure

tax tax differences temporary differences

IAS 12 IAS 12 covers both current and deferred tax. Current tax is fairly easy.

Tax charge Current tax: an estimate of income tax Current tax X payable for the current year Under/overstatement of prior periods X/(X) Deferred tax X ___ Under/overstatement of prior periods: as X ___ the income tax charge on taxable profits is ___ only an estimate, there may be adjustments required in the next accounting period

Deferred tax: see next card

(015)ACF7PC14_CH15.qxp 3/25/2015 12:43 PM Page 89

Current Deferred Taxable temporary Deductible Disclosure

tax tax differences temporary differences

The tax charge in the income statement often bears little relationship to the profit bef ore tax figure because of the differences which exist between tax rules and financial accounting principles.

Accounting for deferred tax

Is recognition of the item different No No deferred tax implications for tax and accounts purposes?

Yes

Is the difference potentially No deferred tax implications

No (permanent difference) only temporary in nature? Liability method Yes

Recognise a deferred tax asset or liability using the r ate of income tax enacted by end of reporting period that is expected to apply to the per iod when the asset is realised or the liability settled.

Page 89 15: Taxation

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Current Deferred Taxable temporary Deductible Disclosure

tax tax differences temporary differences

1 Timing differences Temporary timing differences arise as a result of the fact that certain items of income/expenditure are dealt with for tax purposes on a receipts basis and on an accr uals basis for accounts purposes. At the end of the repor ting period, the timing difference is equivalent to the difference between the accrued income asset and the tax base of the income (amount receiv ed ie nil).

2 Specific timing differences – accelerated capital allowances

When tax (or 'capital') allowances/tax depreciation rates are available at a rate On a cumulative basis calculated as: higher than the accounting depreciation Net book value (NBV) X rates applied to the same assets. Less tax written down value (TWDV) ___ (X) X ___ 3 Revaluations ___

The revaluation of an asset will create a tempor ary difference when it is incorporated in the statement of financial position, insofar as the profit or loss that w ould result from realisation at the revalued amount is taxable. Deferred tax is normally provided out of the revaluation surplus.(015)ACF7PC14_CH15.qxp 3/25/2015 12:43 PM Page 91

Current Deferred Taxable temporary Deductible Disclosure

tax tax differences temporary differences

Deductible temporary differences

Deductible temporary differences At the end of the repor ting period, the arise since certain items of timing difference is equivalent to expenditure are dealt with for tax differences between the accrual and purposes on a payments basis and on the tax base of the payment (amount an accruals basis for accounts paid ie nil). purposes.

16: Presentation of published financial

statements

Topic List All of your studies for Paper F7 will be concerned with the accounts of limited liability companies, so it is important that you are familiar with the IAS 1 formats. Statement of financial position Statement of profit or loss and other comprehensive income Changes in equity Other matters Statement of financial position (IAS 1 revised) 20X7 20X6 matters Other

Statement of Statement of profit or loss and Changes in Other

financial position other comprehensive income equity matters

IAS 1 The standard suggests that all sets of financial statements should apply the disclosures . An entity must explain all departures and, if relevant, why by following IAS/IFRS fair presentation is not achieved.

Current assets All other assets are non-current. Each Expected to be realised/held for sale in normal entity must decide whether to present course of entity's operating cycle current/non-current assets/liabilities Held for trading purposes and expected to be separately. If not, present them in realised within twelve months order of liquidity. Cash or cash equivalent asset not restricted in use

Page 97 16: Presentation of published financial statements

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Notes(017)ACF7PC14_CH17.qxp 3/25/2015 12:48 PM Page 99

17: Reporting financial performance

Topic List This chapter is largely concerned with the statement of

profit or loss. There is no one single IFRS concer ned with reporting financial performance as there is in the IAS 8 UK.

IFRS 5(017)ACF7PC14_CH17.qxp 3/25/2015 12:48 PM Page 100

IAS 8 IFRS 5

IAS 8 Should include all items of income and e xpense for the period (ie not hidden in reser ves) unless an IAS requires/permits otherwise.

Accounting policies Accounting policies are the specific pr inciples, bases, conventions, rules and practices applied by an entity in preparing and presenting statements. An entity follows extant Standards and Interpretations when determining its accounting policies. In the absence of a Standard or Inter pretation covering a specific transaction, other event or condition, management uses its judgement to develop an accounting policy which results in inf ormation that is relevant and reliable, considering in the following order: 1. Standards or Interpretations dealing with similar and related issues 2. The Conceptual Framework definitions and recognition criteria 3. Other national GAAPs based on a similar conceptual fr amework (providing the treatment does not conflict with extant Standards, Interpretations or the Conceptual Framework)(017)ACF7PC14_CH17.qxp 3/25/2015 12:48 PM Page 101

Changes in accounting policy

Only allowed if: Required by standard or interpretation The change will provide more relevant or reliable information about events or transactions Accounting treatment: Restate prior year statement of profit or loss and other comprehensiv e income and statement of financial position Restate opening balance of retained ear nings Include as second line of SOCIE Show effect on prior period at foot of prior year SOCIE

Page 101 17: Reporting financial performance

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IAS 8 IFRS 5

Changes in accounting estimates Prior period errors

Apply prospectively, ie in the current per iod Omissions from and misstatements in the entity's (and future periods if also affected) financial statements for one or more periods

Correct material prior period errors retrospectively in the first set of financial statements author ised for issue after their discovery. Restate comparative amounts for each prior period presented in which the error occurred Restate the opening balances of assets, liabilities and equity for the earliest prior period presented Include any adjustment to opening equity as the second line of the statement of changes in equity Disclose the nature of the error and the amount of the correction to pr ior periods for each line item in each period affected Where it is impracticable to determine the period-specific effects or the cumulative effect of the error, the entity corrects the error from the ear liest period/date practicable (and discloses that fact).(017)ACF7PC14_CH17.qxp 3/25/2015 12:48 PM Page 103

IAS 8 IFRS 5

IFRS 5 Non-current assets held for sale and discontinued operations was published in 2004.

Definitions Discontinued operation A component of an entity that either has been disposed of or is classified as held f or sale and: (a) Represents a separate major line of business or geographical area of operations (b) Is part of a single co-ordinated plan to dispose of a separ ate major line of business or geographical area of operations, or (c) Is a subsidiary acquired exclusively with a view to resale

Component of an Operations and cash flows that can be clearly distinguished, operationally and for financial entity reporting purposes, from the rest of the entity Disposal group A group of assets to be disposed of (b y sale or otherwise) together as a g roup in a single transaction; and liabilities directly associated with those assets that will be tr ansferred in the transaction Asset held for sale Its carrying amount will be recovered principally through sale rather than continuing use

Page 103 17: Reporting financial performance

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IAS 8 IFRS 5

Non-current assets held for sale

Criteria Presentation The asset (or disposal group) must be available for Assets and disposal groups (including associated liabilities) immediate sale in its present condition, subject only to classified as held for sale are presented: usual and customary sales terms and On the face of the statement of financial position The sale must be highly probable. Separately from other assets and liabilities For this to be the case: – The appropriate level of management must be Normally as current assets and liabilities (not offset) committed to a plan to sell; Measurement – An active programme to locate a buyer and complete the plan must have been initiated An entity must measure a non-current asset or disposal g roup – The asset (or disposal group) must be actively classified as held for sale at the lower of: marketed for sale at a price that is reasonable in Carrying amount relation to its current fair value Fair value less costs to sell. – The sale should be expected to qualify for recognition as a completed sale within one year from the date of Immediately before initial classifications, measure asset per classification as held for sale (subject to limited specified applicable IFRS. Any impairment loss accounted for as normal. exceptions) – Actions required to complete the plan should indicate Non-current assets/disposal groups classified as held for sale are not depreciated. that it is unlikely that significant changes to the plan will be made or that the plan will be withdr awn 17: Reporting financial performance

18: Earnings per share

Topic List Earnings per share is a widely used measure of an

entity's performance. It is useful for comparing the results of one entity over time and comparing the performance Basic EPS of an entity's equity against the performance of another entity's equity. Changes in capital structure Diluted EPS(018)ACF7PC14_CH18.qxp 3/25/2015 12:50 PM Page 108

Basic EPS Changes in capital Diluted EPS

structure

IAS 33 This standard aims to improve the comparison of different entities in the same per iod and of the same entity in different periods.

Basic calculation Net profit/loss attributable to ordinary shareholders The net profit or loss used is after interest, tax __________________________________________________ and deductions in respect of non-equity shares. Weighted average no. of shares in issue during the period(018)ACF7PC14_CH18.qxp 3/25/2015 12:50 PM Page 109

Basic EPS Changes in Diluted EPS

capital structure

Changes in capital structure

It is necessary to match the earnings for the year against the capital base giving r ise to those earnings.

Bonus issue Issue at full market Rights issue

The earnings of the entity will not rise (no new funds injected); to price For purposes of calculating the number of shares, treat this as an calculate the number of shares: New capital is introduced issue at full market price followed therefore earnings would be by a bonus issue: Treat bonus shares as if in issue expected to rise from date of new for the full year issue; to calculate the number of Use weighted average number of shares: shares in issue for the period Apply retrospectively, reducing the modified by the retrospective effect reported EPS for the previous Use time weighted average of the bonus element year by the reciprocal of the number of shares for period bonus fraction Bonus element No retrospective effect Actual cum – rights price ______________________ Theoretical ex – rights price

Basic EPS Changes in capital Diluted EPS

Diluted EPS Convertible loan notes or preference

Must be shown on the face of the statement of Net basis earnings X

profit or loss and other comprehensive income Add back loan note interest net of tax and given equal prominence with basic EPS (or preference dividends) 'saved' X ___ Numerators of calculations must be Diluted earnings X ___ ___ disclosed. Denominators must be disclosed No of shares and reconciled to each other Basic weighted average X Other amounts per share may be shown but profit used must be reconciled to a line item Add additional shares on conversion (use in the statement of profit or loss. terms giving max dilution available after y/e) X ___ Diluted number X ___ ___(019)ACF7PC14_CH19.qxp 3/25/2015 1:19 PM Page 111

19: Calculation and interpretation of

accounting ratios and trends

Topic List The emphasis here is on interpretation. Calculation of

ratios will provide only a fraction of available marks. There are many standard ratios, so variations of those shown here may come up and will be acceptable. Profitability The exercise must be done with a clear objective in mind – Liquidity and apply your general financial knowledge, don't just rely on the ratios. And acceptable values will depend on Gearing industry, market strategy etc Investors' ratios(019)ACF7PC14_CH19.qxp 3/25/2015 1:19 PM Page 112

Profitability Liquidity Gearing Investors'

ratios

Cash cycle Why liquidity changes

Credit control efficiency altered Raw Finished Altering payment period of suppliers: many WIP materials goods companies in the recession used their suppliers as a source of funding Inventory control: in the recession many companies reduced their inventory holdings Payables Cash Receivables Profit in to maintain their liquidity

In an economic downturn, liquidity becomes a

crucial issue. Cash flow timing ≠ sales/cost of sales timing as credit is taken Holding inventory delays time between payments for goods to suppliers and sales receipts from Example customers Just think of all those dot.com businesses!(019)ACF7PC14_CH19.qxp 3/25/2015 1:19 PM Page 115

20: Limitations of financial statements and

interpretation techniques

Topic List In this chapter we look at some of the issues which ma y

make financial statements, and ratios based upon them, less reliable than they appear. Limitations of financial statements Accounting policies and the limitations of ratio analysis(020)ACF7PC14_CH20.qxp 3/25/2015 12:56 PM Page 118

Limitations of Accounting policies and the

financial statements limitations of ratio analysis

Limitations of financial statements

A number of factors may make financial statements less reliable than they appear:

Creative accounting – often aimed at reducing gearing The effect of related parties, in particular involving group companies Seasonal trading – timing of year end Asset acquisition – especially just before the year end(020)ACF7PC14_CH20.qxp 3/25/2015 12:56 PM Page 119

Limitations of Accounting policies and the

financial statements limitations of ratio analysis

Accounting policies Choice of accounting policy can affect the financial statements – such as whether to revalue assets or capitalise interest costs. Change of accounting policy can only be justified on g rounds of fairer presentation.

Limitations of ratio analysis

In first year of trading no comparative figures Comparison against industry averages may not be very revealing If based on historic cost, undervalued assets may distort ROCE and gearing Ratios influenced by choice of accounting policy May be distorted by creative accounting measures Results may be distorted by inflation No two companies have the same risk profile, therefore comparison difficult

Page 123 21: Statements of cash flows

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IAS 7 Workings Interpretation

Cash equivalents Direct method

Short-term, highly liquid investments that are readily The operating activities element of the cash flow convertible to known amounts of cash and which are statement is different. subject to an insignificant risk of changes in value

Page 125 21: Statements of cash flows

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IAS 7 Workings Interpretation

Extra information Examining relationships

Extra information not found in other primary Cash flow gearing: compare operating cash statements flows and financing flows, particularly borrowing Relationships between profit and cash shown Operating cash flows to investment flows: match cash recovery from investment to investment Cash equivalents are included in cash balances, giving a better picture of the liquidity of the Investment to distribution: indicates the company proportion of total cash outflow designated specifically to investor return and reinvestment Financing inflows and outflows must be shown, rather than simply passed through reser ves(022)ACF7PC14_CH22.qxp 3/25/2015 1:01 PM Page 127

22: Accounting for inflation

Topic List There are different theories of capital maintenance.

In the UK, when inflation was high, attempts were made to introduce a form of CCA, but companies consistently Capital maintenance ignored it and the standard was eventually abandoned. Without the impetus of high inflation, there is unlik ely to be CPP/CCA any more need to address capital maintenance issues . You are unlikely to be asked anything complex in these areas; make sure you can explain the main terms.(022)ACF7PC14_CH22.qxp 3/25/2015 1:01 PM Page 128

Capital CPP/CCA maintenance

Financial capital maintenance Operating capital maintenance

Under historical cost accounting (HCA), the amount Capital is looked at as the capacity to maintain a maintained is the capital sum put into the b usiness level of assets, alternatively referred to as the by the owner. physical capacity capital maintenance concept , or the entity concept. By using replacement cost for our Focusing on the equity ownership of the entity is cost of sales we will set aside enough cash to b uy often referred to as the proprietary concept of capital : replacement assets. if we pay all profits out as dividends and inflation exists then in future our business will gradually run down, as our cash will become insufficient to b uy replacement inventory.(022)ACF7PC14_CH22.qxp 3/25/2015 1:01 PM Page 129

Capital CPP/CCA maintenance

Current purchasing power (CPP) Current cost accounting (CCA)

The idea behind CPP accounting is that all CCA uses the operating capital maintenance concept. accounts items are restated in ter ms of a stable The assets consumed or sold, and those in the SFP, monetary unit: the $CPP. are stated at their value to the business, the deprival Changes in purchasing power are based on the value, defined as shown in the diagram adjacent. general level of inflation using the RPI Depreciation is charged on non-current assets on CPP measures profits as the increase in the the basis of gross replacement cost of the asset current purchasing power of equity; profits are (where RC is the deprival value) stated after allowing for the declining purchasing Where NRV or EV is the depr ival value, the power of money due to price inflation charge against CCA profits will be the loss in Lower of value of the asset during the accounting period Goods sold are charged at their replacement cost Replacement Higher of cost (RC) A typical set of CCA is prepared b y adjusting SFP values with a supporting current cost reserve, and Net realisable Economic taking a HC P&L and making CCA adjustments value (NRV) value

Page 133 23: Not-for-profit and public sector entities

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Primary Regulatory Performance

aims framework measurement

Performance measurement Not judged by bottom line profit but must show that they have managed their funds properly. Performance measured in terms of achievement of stated purpose Possible performance measures are: 3Es – Economy, Efficiency, Effectiveness KPIs – Key performance indicators – specific to that organisation VFM – Value for money – and best value for outside services Impact report – produced by some charities to show measure of achievement – what impact did they have?(023)ACF7PC14_CH23.qxp 3/25/2015 1:05 PM Page 135